Bills Digest no. 97 2007–08
Reserve Bank Amendment (Enhanced Independence) Bill
2008
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Reserve Bank Amendment (Enhanced
Independence) Bill 2008
Date
introduced: 20
March 2008
House: House of Representatives
Portfolio: Treasury
Commencement:
Day after Royal
Assent
Links: The
relevant links to the Bill, Explanatory Memorandum and
second reading speech can be accessed via BillsNet, which is at
http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
To amend the Reserve Bank Act
1959 (the Act) to allow the Governor-General instead of the
Treasurer to appoint, suspend and terminate the Governor and Deputy
Governor of the Reserve Bank.
Throughout this digest, reference to the Governor-General means
the Governor-General acting on the advice of Federal Executive
Council.
On the 6 December 2007, the Government released a
Statement on the Conduct of Monetary Policy. The Statement set
out the common understanding of the Governor, as Chairman of the
Reserve Bank Board, and the Government on key aspects of
Australia's monetary policy framework . In both the Statement and
the accompanying
joint media release of the Prime Minister the Hon. Kevin Rudd
and the Treasurer the Hon. Wayne Swan, the Government announced
that it would make a number of changes to enhance the independence
of the Reserve Bank of Australia (RBA) and the transparency of
certain of its operations. The release outlined the following
elements would be implemented:
- the positions of Governor and Deputy Governor to be raised to
the same level of statutory independence as the Commission of
Taxation and the Australian Statistician
- the appointments of both positions would be made by the
Governor-General in Council, and their terminations will require
parliamentary approval
- the Secretary to the Treasury and the Governor of the RBA will
maintain a register of eminent candidates of the highest integrity
from which the Treasurer will make appointments to the Board,
and
- The new Statement on the Conduct of Monetary Policy included
measures such as the publication of Board minutes, and a statement
of reasons for the decisions of the Board.
The first two dots points are the subject of this Bill.
When in opposition, Mr Swan foreshadowed changes to improve the
appointments process for the RBA Board by stating[1]:
The changes would seek to prevent a re-run of
the Robert Gerard affair where Treasurer Peter Costello intervened
in the short listing process to nominate and eventually select for
the Board an influential Liberal Party donor who was subject to a
high profile tax office investigation that resulted in more than
$100 million in tax and penalties being paid.
This refers to the case of a Board member Mr Robert Gerard AO,
who was appointed by the previous government on 25 March 2003, and
who tendered his resignation on 2 December 2005 after it was
revealed that his private company was involved in Federal court
action over a dispute on tax matters with the Australian tax
office.[2]
When the Reserve Bank was first established in 1959, the
Governor-General had the function of appointing and terminating the
positions of the Governor and the Deputy Governor of the RBA. In
the Financial Sector Legislation Amendment Act (No. 1)
2002[3] this
state of affairs was changed to give the functions to the
Treasurer. Under those amendments the Treasurer was given the
function of:
- Appointing the members of the RBA Board under section 14 of the
Act
- Terminating Board members under section 18 of the Act
- Appointing and terminating the Governor and the Deputy
Governor
- Appointing and terminating members of the Payments System
Board
The change from the Governor-General to the Treasurer was not
opposed at the time. The then government argued that the amendments
would streamline the appointment and termination process.
Commenting on the 2002 Bill, the Bills Digest
said[4]:
Some may argue however that the claimed
efficiency gains in the process of appointment and termination come
at the expense of an important safeguard against capricious action
by a future Treasurer.
In November 2002, the then government commissioned John Uhrig,
AO, to review the corporate governance of statutory authorities. In
June 2003, the then Prime Minister was given the
Review of the Corporate Governance of Statutory Authorities and
Office Holders, and it was finally released on 12 August
2004.[5] The Report
contained 6 main recommendations:
- the Government should clarify the expectations of statutory
authorities by Ministers issuing Statements of Expectations,
authorities responding with Statements of Intent, and the Minister
making both documents public
- the role of portfolio departments as the principal source
of advice to Ministers should be reinforced by requiring
statutory authorities to provide relevant information to
departmental secretaries, in parallel to that information being
provided by statutory authorities to Ministers
- boards should be used only when they can be given full
power to act. It is not feasible to have a board in
authorities where Ministers play a key role in the determination of
policy. In this case, governance can best be provided by executive
management
- the government should create a centrally located group
to advise on the application of appropriate governance structures
when establishing statutory authorities
- an Inspector-General of Regulation should be created
to investigate procedures used by regulatory authorities, and
- the legislative basis for statutory agencies should be
simplified the Financial Management and Accountability Act
1997 should be applied to budget funded statutory authorities;
the Commonwealth Authorities and Companies Act 1997 should
be applied to authorities that are legally and financially separate
from the Commonwealth.
In summary, Mr Uhrig recommended more formal reporting
requirements for agencies, two new central agencies to monitor the
governance of statutory authorities, and the application of either
an executive management or board template.[6]
In 2006, Dr Meredith Edwards[7] published results of an Australian Research
Council (ARC) empirical study on corporate governance practices in
the Australian public sector. Dr Edwards outlines the four main
stages in selecting and appointing to a public sector board to
achieve better practices. These are:
- Preparation: developing a vacancy profile
- Selecting and locating suitable candidates
- Assessing and vetting potential candidates
- Final selection and appointment[8]
It is noteworthy that the present Bill is silent on the
appointment of the members of the Board other than the Governor and
Deputy Governor. The second reading speech[9] refers to the register of eminent
candidates that will be drawn up by the Secretary to the Treasury
and the Governor of the Reserve Bank and which will be made
available for the Treasurer to select appointees. On Board
appointments Uhrig stated:
In order to get the best from the board, and
the entity itself, it is important to ensure the board has the
necessary skills and experience to carry out its responsibilities.
The ability of a board to provide effective governance will be
placed in jeopardy if its members are inexperienced or
inappropriately skilled or the board as a whole is dysfunctional.
To ensure this does not occur, Ministers need to be well supported
in terms of advice in the appointment process.[10]
The other issue on which the Bill is silent is the continued
presence of the Secretary of the Treasury on the Reserve Bank board
as an ex officio member. According to the Bills Digest on
the 2002 amendments:
It is worth noting that the position of a
representative of the Treasury on the RBA Board has been a matter
of public controversy. The RBA is the only central bank in the OECD
that has a treasury official on its governing board. Critics have
claimed that this undermines perceptions of the Bank s independence
from government. There is a considerable body of economic
literature which suggests that central bank independence enhances
the effectiveness and credibility of monetary policy. In 2000 the
ALP members of the House of Representatives Standing Committee on
Economics, Finance and Public Administration called for the
examination of a proposal to enhance the independence of the Bank
by removing the Secretary to the Treasury from the RBA Board.
Supporters of the current arrangements argue that they assist in
the co-ordination of monetary and fiscal policy. (footnotes
omitted)[11].
The Uhrig review discouraged any representational appointments
(stakeholders and government representatives) to boards, and Dr
Edwards, commenting on the issue of a government representative in
the survey results, stated:
There were more differences in view as to
whether a departmental representative should be on the board. Uhrig
was opposed to departmental representatives being on boards but
kept the door open: Membership of the board by the departmental
secretary is unwise unless there are specific circumstances which
require it.
Now that the Uhrig recommendations are coming
into force and the relative power of the portfolio secretary vis a
vis the board chair has been enhanced, the case for a departmental
representative on the board could, arguably, be said to be
reduced.[12]
As previously mentioned, the Government s announcement of the
new procedures in relation to the Governor and the Deputy Governor
stated that the positions were being raised to the same level of
statutory independence as the Commissioner for Taxation and the
Australian Statistician.
The Commission of Taxation is appointed by the Governor-General
under section 4 of the Taxation Administration Act 1953
(TAA) and suspended, retired or removed on the grounds set out in
section 6C of that Act.
Section 6C of the TAA is set out in full in Appendix A to this
Digest. It is worth noting in particular that the ground of proved
misbehaviour applies to the Taxation Commissioner but is not an
included ground in this Bill.
In brief, section 6C of the TAA provides that the Taxation
Commissioner can be removed from office by the Governor-General on
the grounds of proved misbehaviour or incapacity at the request of
both houses of Parliament (subsection 6C(1)). The Commissioner can
be suspended from office by the Governor-General on the same
grounds without the involvement of Parliament (subsection
6C(2)).
In the event of suspension for misbehaviour or incapacity, there
is a statement presented to Parliament and if Parliament does not
present an address under subsection (1) to the Governor-General
within 15 sitting days the suspension will terminate (subsection
6C(4)) and the Commissioner will be reinstated.
The Governor-General must remove the Commissioner on the grounds
of bankruptcy, taking outside unauthorised employment or for
absence from duty (paragraphs 6C(6)(a)-(c)). Parliament has no role
in the Commissioner s removal on these grounds.
The provisions for the removal of the Australian Statistician
are similar to the taxation provisions, but the expression
misbehaviour is used, not proved misbehaviour . [13]
Under the Customs Administration Act 1985 the Chief
Executive Officer (CEO) can be removed or suspended under
provisions in the same terms as the Taxation Administration Act
1953.
The Chair and members of the Australian Prudential Regulation
Authority (APRA) are appointed by the Governor-General.[14] The Minister must be
satisfied a person is qualified for appointment by virtue of his or
her knowledge or experience relevant to APRA s functions and
powers.[15]
The Governor-General can terminate the appointment of a member
of the APRA for misbehaviour, incapacity, bankruptcy and certain
insolvency activities, absence from duty, unapproved outside
employment, non-disclosure of conflicts of interest and other
matters.[16]
The members of the Australian Securities and Investment
Commission (ASIC) are appointed by the Governor-General on the
nomination of the Minister.[17] The Australian Securities and Investments
Commission Act 2001 requires the Minister to nominate a person
as a member of ASIC to have knowledge or experience in fields such
as business, administration of companies, financial markets,
financial products and financial services, law, economics or
accounting.[18]
The Governor-General can terminate the appointment of a member
of the ASIC for misbehaviour, incapacity, bankruptcy and certain
insolvency activities, absence from duty, unapproved outside
employment, non-disclosure of conflicts of interests and
contravention of similar probity requirements.[19]
Members of the National Competition Council are appointed by the
Governor-General and must have knowledge or experience in industry
commerce, economics, law, consumer protection or public
administration.[20]
Under the proposed changes in Bill the Governor-General can
terminate or suspend the Governor or the Deputy Governor on the
grounds set out in new subsection 25(8) of the
Bill. The grounds (truncated) are:
- incapacity to perform the duties
- taking outside employment, or
- insolvency.
It should be noted that the positions of Governor and Deputy
Governor (and board members) are held subject to good behaviour
[21], and this is
discussed below in the main provisions part of this Digest.
The Bill incorporates similar mechanisms as those applying to
the Tax Commissioner of requiring an address from both Houses of
Parliament to the Governor-General and the role of the
Governor-General in suspending and removing the position
holder.
A Working Paper published by the International Monetary Fund
surveyed boards and management structures and practice in Central
Banks included guidelines on central bank autonomy and
accountability.[22]
In relation to the position of Governor, the main guideline is
that the entity nominating (selecting) the Governor should be
separate from the entity appointing the position holder:
[t]o provide some measure of balance, bearing
in mind the institutional balance.[23]
In relation to dismissal, the guideline is:
Dismissal should be only for breaches of
qualification requirements, or misconduct: lack of performance
could also be grounds if clearly defined in terms of the primary
objective and specific targets. The latter could be ruled upon
according to a suitable and independent judicial procedure, and
perhaps be with the consent of the legislature.[24]
In relation to Boards, similar guidelines on selection and
appointment applied, as well at to dismissal.
On the composition of a Board, there should be a reasonably well
informed (knowledge/ expertise) and a balanced view, but conflicts
of interest are to be avoided. Direct government representatives
should be eliminated from a policy board and also from a monitoring
board. However:
If a government representative does participate
in a policy board, it should at least be without the right to vote
(though it might be with a limited, temporary veto power).[25]
The Daily Telegraph[26] has recently published very
critical arguments about the Governor of the RBA. In particular it
featured this Bill on 8 April 2008 in an article by Malcolm Farr
headed
RBA boss Glenn Stevens is Mr Unsackable . This article refers
to concerns that the reforms are going too far and that a rogue
governor whose statements create turmoil in financial markets could
not be removed . The article states that the proposed laws have
been drawn up as a political response to claims by the previous
Coalition government that Labor would intrude on the bank s
operation .
On the same day, 8 April 2008, the Daily Telegraph s
Piers Akerman[27]
also attacked the Bill in similar terms by stating, amongst other
things:
Nor is there any provision for terminating an
incompetent or rogue bank governor, and there doesn t appear to be
any way of dismissing a governor who is convicted of criminality,
let alone making a series of bad decisions.
The Australian criticised the Daily Telegraph
for the attack on the Reserve Bank Governor by reporting:
This economically illiterate piece of populism
is offensive but, fortunately, irrelevant in the broader debate on
monetary policy.
The Age reported on the Bill on 27 March 2008 and gave
credit for improved independence measures, but cautions that the
new arrangements may give too much protection:
Independence needs to be balanced with
accountability for performance, especially in relation to inflation
outcomes. Yet the proposed Reserve Bank Amendment (Enhanced
Independence) Bill does not contain any provision for removing the
RBA s senior officers on the grounds of poor inflation
outcomes.[28]
The Australian Financial Review reported on 10 April
2008 that the Treasurer, Mr Swan supported the independence of the
Reserve Bank:
The Reserve Bank has been under concerted
attack in some section of the media in the past week for being out
of touch with the effect its policies have on households.
The opposition has joined the attack.
Mr Swan last night backed the central bank but
refused to comment on whether it has pushed interest rates up one
time too many.
You either believe in the independence of the
Reserve Bank or you don t, he said.
Items 1 and 2 amend section 24
and section 24B of the Act to delete reference to the Treasurer and
substitute it with the Governor-General. Section 24 currently
provides that the Governor and the Deputy Governor are to be
appointed by the Treasurer for a period of 7 years but are eligible
for reappointment. Paragraph 24(1)(c) provides that the Governor
and the Deputy Governor hold office subject to good behaviour .
Members of the Reserve Bank Board also hold office subject to good
behaviour.[29]
Section 24B is the resignation provision.
Item 3 repeals section 25 and substitutes
new section 25 to provide for the termination of
the appointments of the Governor and the Deputy Governor. Existing
section 25 provides:
(a) becomes permanently
incapable of performing his or her duties; or
(b) engages
in any paid employment outside the duties of his or her office;
or
(c) becomes
bankrupt, applies to take the benefit of any law for the relief of
bankrupt or insolvent debtors, compounds with his or her creditors
or makes an assignment of his or her salary for their benefit;
the Treasurer
shall terminate his appointment.
These grounds for
termination are replicated in new subsection 25(8)
and therefore are the only grounds for the termination of the
positions. Under the existing arrangements, paragraph 24(1)(c) may
give the Treasurer the discretion to terminate the
Governor on (lack of) good behaviour grounds whereas section 25
requires the Treasurer to terminate if one or more of the
stated grounds are met. There is currently no limitation in section
25 as there is in this Bill and the TAA that there shall be no
termination except as provided by this section .[30]
New
subsection 25(1) provides that the Governor-General can
terminate the appointments if each House of Parliament presents to
the Governor-General an address praying for the termination of the
appointments on a ground specified in new subsection 25(8).
Suspension prior to such termination is not necessary under this
subsection.
The
Governor-General can suspend the Governor or Deputy Governor from
office on a ground specified in subsection 25(8)
and the Minister (the Treasurer or Minister representing the
Treasurer) has to table a statement concerning the suspension in
both Houses of Parliament within 7 sitting days. Within 15 sitting
days of the statement, the Houses can then declare by resolution
that the appointment should be terminated (new subsection
25(4)). If both Houses do not pass such a resolution, the
suspension ceases, and the position holder will continue in office
(new subsection 25(6)). In the event the
resolution is passed by each House, the Governor-General must
terminate the appointment under new subsection
25(5).
New
subsection 25(9) provides that the termination of the
Governor or the Deputy Governor can only be terminated on a
specified ground and by the means specified by new section
25. This limits termination to the grounds specified and
in the manner specified by the section. As noted earlier, the
Governor and Deputy Governor hold office subject to good behaviour
which is an on-going requirement and a prerequisite for holding
office. The Reserve Bank Act is the only Commonwealth Act which has
this particular expression. Under the changes proposed by the Bill,
in the event the position holder is not of good behaviour there is
no mechanism for termination as this requirement is not specified
as a ground under new subsection 25(8). If a
Governor or Deputy Governor did not offer a resignation to the
Governor-General under amended section 24B there
is no power to remove the Governor or Deputy. This can be
contrasted to the present position in that although the grounds of
removal from office are the same, there is no strict limitation on
the Treasurer s current power to terminate an appointment as will
the case under the proposed amendments.
Concluding comments
The reforms in the Bill achieve an arms length process in the
appointment and termination of the Governor and Deputy Governor by
substituting the Governor-General in place of the Treasurer, and
incorporating Parliament in the suspension and termination of the
positions. These changes are based on the processes that apply to
the statutory positions of the Commissioner for Taxation and the
Australian Statistician. However, the Bill does not follow exactly
other aspects of these positions such as the grounds of termination
or suspension.
The Bill does not address the rest of the Board s appointment
and termination processes, the continuing presence of the
departmental representative on the Board, or the qualifications of
members of the Board. In this regard, it may be useful to reflect
on the key points in the previously-mentioned IMF paper which
surveyed Central Bank Boards and Management for best practice in
order to address both transparency and accountability.[31]
Parliament may note that there are disparities and differences
existing in the legislation across the board dealing with statutory
authorities, agencies and Boards depending on the functions and
roles of the bodies in question. A full examination and comparison
of these aspects of governance has not been undertaken in this
Digest, due to the minor and technical changes being made in this
Bill.
6C Suspension and removal from office
of Commissioner or Second Commissioner
(1) The Governor-General may remove the
Commissioner or a Second Commissioner from office on an address
praying for the removal of the Commissioner or the Second
Commissioner, as the case may be, on the ground of proved
misbehaviour or physical or mental incapacity being presented to
the Governor-General by each House of the Parliament in the same
session of the Parliament.
(2) The Governor-General may suspend the
Commissioner or a Second Commissioner from office on the ground of
misbehaviour or physical or mental incapacity.
(3) Where the Governor-General suspends the
Commissioner or a Second Commissioner, the Minister shall cause a
statement of the grounds of the suspension to be laid before each
House of the Parliament within 7 sitting days of that House after
the suspension.
(4) If, at the expiration of 15 sitting days of
a House of the Parliament after the day on which the statement was
laid before that House, an address under subsection (1) has not
been presented to the Governor-General by each House of the
Parliament, the suspension terminates
(5) The suspension of the Commissioner or a
Second Commissioner from office under this section does not affect
any entitlement of the Commissioner or Second Commissioner, as the
case may be, to be paid remuneration and allowances.
(6) If:
(a) the Commissioner or a Second Commissioner
becomes bankrupt, applies to take the benefit of any law for the
relief of bankrupt or insolvent debtors, compounds with his or her
creditors or makes an assignment of his or her remuneration for
their benefit;
(b) the Commissioner or a Second Commissioner
engages, except with the approval of the Minister, in paid
employment outside the duties of the office of Commissioner or
Second Commissioner, as the case may be; or
(c) the Commissioner or a Second Commissioner
is absent from duty, except on leave of absence, for 14 consecutive
days or 28 days in any 12 months;
the Governor-General shall remove the
Commissioner or Second Commissioner, as the case may be, from
office.
(7) The Governor-General may, with the consent
of the Commissioner or a Second Commissioner, retire the
Commissioner or Second Commissioner, as the case may be, from
office on the ground of physical or mental incapacity.
(8) The Commissioner or a Second Commissioner
shall not be suspended, removed or retired from office except as
provided by this section.
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Diane Spooner
29 April 2008
Bills Digest Service
Parliamentary Library
© Commonwealth of Australia
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by the Copyright Act 1968, no person may reproduce or transmit any
part of this work by any process without the prior written consent
of the Parliamentary Librarian. This requirement does not apply to
members of the Parliament of Australia acting in the course of
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Parliament using information available at the time of production.
The views expressed do not reflect an official position of the
Parliamentary Library, nor do they constitute professional legal
opinion.
Feedback is welcome and may be provided to: web.library@aph.gov.au. Any
concerns or complaints should be directed to the Parliamentary
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